Returning To The Argument: Can Health Reform Reduce Costs?

Here we are again, having yet another argument about whether health care reform can really reduce costs. The occasion this time is the recent announcement by several insurers of their intention to raise premiums on policies they sell directly to individuals. The increases are necessary, the insurers say, because the Patient Protection and Affordable Care Act forces them to enroll sicker patients and provide more benefits. And both changes will cost them money.

The critics of health reform have been quick to cite this announcement as proof that their suspicions were right all along. They say it shows that the health overhaul will force us to pay more for our health care — via some combination of higher premiums, higher out-of-pocket payments and higher taxes — because that is what happens when government decides to expand coverage or strengthen benefits for everybody. “These may be good things which consumers value,” conservative analyst Grace Marie-Turner wrote this week, “but they are not free.”

It’s an alluringly simple argument — and, if you’re among those people who are suspicious of government intervention anyway, an appealing one. But is it the correct argument? Don’t be so sure. Think of health care reform as two separate sets of changes that, from a cost perspective, will push in exactly the opposite direction. First there are the changes that will make health care more expensive. You got a taste of those this week on the six-month anniversary of the law’s enactment, when a set of new consumer protections went into effect — prohibiting insurers from, for example, refusing to pay emergency room charges just because a beneficiary went to a hospital outside of the normal provider network.

But the really big changes come in 2014, when carriers begin selling policies to individuals directly through new regulated marketplaces called insurance “exchanges.” At that point, the policies insurers sell through the exchanges will have to include a basic set of benefits — and will have limits on how much out-of-pocket spending they can pass along.

Of course, something else will take place in 2014. That’s the year that the vast expansions of insurance coverage happen. The government will start enrolling all poor people, rather than just women with children and other select groups, into Medicaid. And it will start offering subsidies to people who buy coverage through the exchanges. More than 30 million additional people will end up getting insurance because of these changes in the health law, according to government projections.

All of these changes will cause more money to flow into the health care system, usually as premiums or taxes. And you could make a pretty good case (in fact, I would make the case) that the benefits are worth the extra expense, since it means sparing millions of people from serious financial hardship and, in some cases, giving them access to medical care that could literally save their lives.

But that brings us to the second set of changes — the ones that are designed to make health care less expensive. The law targets wasteful spending — that is, instances where either individuals or the government is paying too much for what some part of the health care industry is providing. An example of this is the requirement, soon to be enacted, that insurers spend a larger portion of premium dollars on actual medical care. (In wonk speak, that’s called setting higher “medical loss ratios.”) Many experts believe this will act as a natural break on premiums in the private sector, since it will limit insurers’ abilities to raise prices if they’re not also providing more care.

But, particularly over the long term, the big savings in health reform will come from efforts to reduce wasteful care rather than wasteful payments. Scores of studies, dating back decades, have shown that our medical system routinely provides unnecessary treatment — by failing to administer routine preventive measures, by duplicating treatments because of miscommunication among providers, and by doling out care that is at best unproven and at worst harmful. The health overhaul attacks this problem by, among other things, rewarding use of electronic medical records and creating an institution to study which treatments work best. It also imposes a tax on the most generous insurance policies — on the theory, widely supported by economists, that the tax will encourage insurers (and consumers) to find ways to save money.

So what’s the upshot, once you add up the ways the health law will make health care expensive and the way it will make care less expensive? There’s obviously no way to be sure. But the best estimates we have, from government and independent authorities, is that over the first ten years or so total spending will be a little higher but by a trivial amount. That is, we’ll be spending pretty close to what we would have without the law. That’s actually quite impressive, given all of the new benefits and security these reforms will provide. More important, after ten years, according to these estimates, spending should actually start to rise a little more slowly. And it’s that long-term trend that really matters for our country’s future.

You shouldn’t be satisfied with that outcome. In order to get the health overhaul through Congress, its proponents had to soften the cost control provisions — by, for example, nixing a public option that could have helped bargain down payments to health care providers even more. If health care spending doesn’t come down more dramatically, then it’s going to siphon away more and more resources from our society. But that doesn’t mean health care reform can’t reduce costs. It simply means that, with some modifications, reform could reduce costs even more.